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Different types of costs related to the cost of capital

The following are the various relevant costs associated with the problem of measurement

of firm’s cost of capital.

 

(i)                 Marginal Cost of Capital. It is the current interest on long term debt. In other words, the marginal cost of capital is the weighted average cost of new or additional funds raised by the company.

 

(ii)               Specific Cost. Specific cost is the cost which is associated with the particular component of a capital structure.

(i)                 For example. Equity shares, debentures etc. It is also known as component cost.

 

(ii)               Combined Cost. It is the cost of capital of all the sources taken together i.e., debt, equity and preference share capital. The combined cost of capital can be otherwise called as average cost or weighted cost of capital.

(iii)             Spot Cost. Spot cost represents costs prevailing in the market at certain point of time.

 

(iv)             Future Cost. It is the cost which is related to the cost of funds intended to finance the expected project.

 

(v)               Historical Cost. Historical costs are the costs which are calculated on the basis of existing capital structure of the firm.

 

(vi)             Explicit Cost. Explicit cost of any source of fund may be expressed as the discount rate that equates the present value of cash inflows that are incremental to the taking of the financial opportunity with the present value of its incremental cash outflows.

 

(vii)           Implicit Cost . Implicit cost is the opportunity cost. It is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the project presently under consideration by the firm were accepted.

 

(viii)         Normalised Cost. It is the long term cost. It indicates an estimate of cost by some averaging process from which cyclical element is removed.